Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how R.R. Donnelley (Nasdaq: RRD) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

R.R. Donnelley yields 5.4% -- quite strong and worthy of further investigation.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

R.R. Donnelley's payout ratio is 106%, raising a potential red flag.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

R.R. Donnelley's debt-to-equity ratio is 156%. Its interest coverage rate is three times.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Let's examine how R.R. Donnelley stacks up next to its peers:


5-Year Annual Earnings-Per-Share Growth

5-Year Annual Dividend Growth

R.R. Donnelley



Quad/Graphics (NYSE: QUAD)



McGraw-Hill (NYSE: MHP)



Avery Dennison (NYSE: AVY)



Source: Capital IQ, a division of Standard & Poor's. *Three-year growth figures. NM = not meaningful; Quad/Graphics started paying a dividend in May.

The Foolish bottom line
R.R. Donnelley uses a considerable amount of leverage and has a fairly high payout ratio, although its free-cash-flow-based payout ratio is considerably lower than the measure based on earnings. Dividend investors need to keep a close eye on the company to make sure it sees income recover soon.

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Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.